Fujifilm Sues Xerox for $1 Billion over Failed Merger Deal

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The Xerox-Fujifilm saga continues to roll on, with Bloomberg reporting that today in the U.S. District Court in Manhattan, Fujifilm of Tokyo, Japan, accused Xerox of “intentional and egregious conduct” and filed a $1 billion breach-of-contract lawsuit against Xerox for backing out of a proposed $6.1 billion sale of Xerox to Fujifilm. Under that deal, Xerox would have been merged with Fuji Xerox, with Fujifilm gaining a controlling 50.1 percent majority interest in the new merged company.

In the complaint filed today, Fujifilm said: “This change of heart is undoubtedly due to external pressures. Xerox has recently been subject to the whims of activist investors Carl Icahn and Darwin Deason, who, notwithstanding their minority ownership of Xerox shares, have yanked the Xerox Board in more directions than can be counted.”

Icahn and Deason, who together own about 15 percent of Xerox shares, have been opposed to the deal since its announcement by Xerox in January 2018, saying that the deal, which would have seen Xerox shareholders receive about $32 per share, undervalues Xerox They have also said that, instead, they would be open to all-cash offers of $40 per share or more for Xerox. Xerox is currently trading at about $27 per share.

Fujifilm accused Xerox of giving in to the “whims of Carl Icahn and Darwin Deason” in scrapping the deal. It’s seeking more than $1 billion plus punitive damages. it’s also seeking a declaration that Xerox owes it a $183 million termination fee.  The $1 billion is said to reflect “the value Fujifilm’s shareholders would have received had Xerox fulfilled its end of the bargain, along with punitive damages for Xerox’s intentional and egregious conduct.”

In a statement released today, Xerox denied that it breached the contract and said that it’s “extremely confident” that the former board acted correctly in terminating the transaction, “due to, among other things, the continuously expanding unresolved accounting issues at Fuji Xerox,” Xerox’s decades-old joint venture with Fujifilm.

After Xerox scrapped the deal, it replaced its CEO, Jeff Jacobson, with Icahn-backed John Visentin, and appointed Keith Cozza, CEO of Icahn Enterprises, chairman of the Xerox board.

Fujifilm’s complaint also argues that the now-scrapped deal would have generated “billions of dollars in synergies,” and that the transaction is “value-enhancing for Fujifilm’s shareholders and thus Fujifilm is compelled to take steps to protect steps to protect its rights.” The company accused the former Xerox board of breaching the terms of its agreement announced in January 2018 “thanks in no small part to Icahn and Deason’s machinations.”

Earlier this month, Fujfilm CEO Shigetaka Komoro said that Fujifilm might walk away from any deal with Xerox, stating it “may have no choice but to abandon a $6.1 billion merger with Xerox Corp if there is no progress in talks with the U.S. firm’s new board for about half a year.” He also said that Icahn and Deason’s offer of $40 per share for Xerox is too high.

One obstacle that may obstruct Fujifilm’s breach-of-contract lawsuit is that in April, a New York state judge blocked the merger, ruling that the deal was so tainted by conflict it was likely that the Xerox board and former CEO, aided by Fujiflm, had breached their duty to Xerox shareholders.

According to Robert Schiffman, Bloomberg Intelligence senior credit analyst, the newly filed lawsuit and other litigation might drive Xerox bonds into junk territory.

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